What to think about when pricing a product

“Of all the words associated with marketing, the one we should focus on the most is value. This is because when you boil down what we as marketers do, it is about creating, generating, communicating and then harvesting value.” Those are the words of Professor Mark Ritson, leader of Marketing Week’s Mini MBA in Marketing.

But getting pricing right is a complex art, and one that many marketers struggle with, something which he looks to address during the course’s ‘pricing’ module.

As Harley Mathieson, social media manager at travel company David Urquhart, and a recent graduate of the course, says, “It’s easy to get involved in the glamorous creative side of the marketing process; I suspect fewer of us have a strong foundation in the fourth ‘P’.”

The pricing ‘P’ is different to the other ‘Ps’ in the marketing mix because it isn’t about creating value for the customer, it is about reaping value for the organisation.

Ritson quotes Professor Mark Bergen, who describes pricing as the point “where all of your marketing strategy really meets that final decision point with your customers”.

It is a statement that struck a chord with Jolanda Wells, UK product manager at natural product specialist Rio Health, and another recent graduate.

“It reinforced the thinking that pricing is the ultimate moment of truth, as it is the final decision point for consumers. It’s make or break. Get it right and everyone’s happy, get it wrong and all of the months or years of work which have preceded it go out the window.

“I work in FMCG where price is critical, and will therefore be focusing on it more for my next new product development launches by using focus groups to test different price points.”

Communicating the value of a product

The module explores two key approaches to pricing: cost plus pricing and value-based pricing, both based on Robert J Dolan and John T Gourville’s ‘Pricing Thermometer’ concept. While the former model is simple – comprising the cost of goods sold plus a profit margin – it has many drawbacks, not least, as Ritson says, “leaving money on the table” due to not taking the product’s true value into account.

The value-based pricing approach however, while more complex and requiring research, looks at crucial factors including true economic value and perceived value. The gap between the two is a measure of an organisation’s true marketing core competence, based on whether the consumer has understood the value of the product.